Loans can be effective for paying off debt and achieving financial freedom once and for all. Debt consolidation is an option recommended by the Federal Trade Commission as a strategy for getting out of debt. If the debtor receives calls from debt collectors and creditor letters every day, debt consolidation can help by combining all debts into a single, smaller payment.
Some self-discipline is required to get out of debt by borrowing more money, but most consumers report that debt consolidation is easier than paying off existing debts by making minimum payments or negotiating with each creditor for a reduced payment or interest rate. Debt consolidation loans are offered by the federal government, credit unions, banks, and finance companies.
Student loan consolidations, personal consolidation loans, and home equity loans are available. Before requesting a consolidation loan, take the following steps:
Step #1: List and Categorize Debts
Create a list of every creditor, amount owed, and the account number. Then, categorize every debt by type, such as credit cards, federal and private student loans, and personal loans, such as medical bills. Consider transferring existing credit card balances to a single lower APR credit card or include the credit card amounts owed in a debt consolidation loan.
If most of the debt owed is credit card debt, a balance transfer is often the best choice to immediately reduce higher interest rate charges and lower monthly payments. This process requires the opening of another credit card account. The borrower must use the account only to transfer outstanding credit card balances. Some credit cards offer a zero annual percentage rate (APY) for a period of time. It’s important to compare fees and APY charges offered by different credit cards before deciding to open a new credit card account.
Step #2: Order Credit Reports
Request a credit report from each of the three major credit reporting agencies (CRAs). Analyze each report to ensure that details are accurate and correct prior to taking next steps. Initiate the debt dispute process if any errors are identified by writing the CRAs. Include proof with the letter and send it by certified mail with requested receipt.
The dispute initiation process is outlined by the FTC. Sample debt dispute letters are included on the website.
Because it is essential to know that reported debt is accurate before consolidating existing balances, don’t skip this step. Consumer credit history, along with FICO credit score, affects the cost of loans, credit interest rates, and even loan maturities.
Step #3: Student Loans
The U.S. Department of Education (DoE), banks, and private finance companies also offer student loan consolidation. Private student loans can’t be consolidated by the Department of Education, so it is important to compare financial institutions’ rates and terms as well.
Many people decide to consolidate federal student loans with the DoE and then consolidate private loans with a bank or credit union. Federal loan consolidation terms do not rely upon the borrower’s credit score.
Step #4: Personal Consolidation Loans
Many lenders offer personal consolidation loans. The consolidation loan can be used to consolidate both credit card and personal debts. Compare rates and evaluate lender requirements. Some lenders offer specific debt consolidation loans and others offer the borrower loans for any use.
Unsecured loans may be challenging for consumers with less than good credit, because interest rates and possibly loan maturity lengths reflect the borrower’s credit score.
Step #5: Home Equity Loans
Home equity loans can be an excellent choice for homeowners with equity in their home. A home equity loan allows the debtor to consolidate every debt. The home equity loan typically offers lower rates but maturity dates may be longer. Since this type of loan is secured by the home as collateral, lender risk is lower. A home equity loan can also help the borrower save money on taxes.